TY - JOUR
T1 - Tax and subsidy incidence equivalence theories
T2 - Experimental evidence from competitive markets
AU - Ruffle, Bradley J.
N1 - Funding Information:
I thank Suleiman Abubader, Ted Bergstrom, Juergen Bracht, Jeremy Clark, Alex Cukierman, Guillaume Frechette, David Genesove, Moshe Justman, Todd Kaplan, Marvin Schrieder, Uri Simonsohn, Avia Spivak, Bart Wilson, two anonymous referees, the guest editors of this special issue and seminar participants at Ben-Gurion University, Hebrew University, Osaka University, Tel Aviv University, the Economic Science Association Meetings in Barcelona and the Far Eastern Econometric Society Meetings in Kobe for comments. I also thank my research assistants, Gil Attia, Michal Mozer, Iris Mini, Inna Spierberg, Lilach Sudak, Tsafi Vana and Liat Winner, as well as Noam Green for programming the software for the transaction graphs. Financial support from the Ben-Gurion University is gratefully acknowledged. This version of the paper was completed during a year as a visiting research fellow at the Harvard Business School. I thank them and Alvin Roth in particular for their support and hospitality. The incidence of any remaining shortcomings must be fully borne by me.
PY - 2005/1/1
Y1 - 2005/1/1
N2 - A basic tenet in microeconomics is tax incidence equivalence, which holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem for subsidies. For sufficiently large markets, the results show strong support for both theories; there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.
AB - A basic tenet in microeconomics is tax incidence equivalence, which holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem for subsidies. For sufficiently large markets, the results show strong support for both theories; there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.
KW - Competitive markets
KW - Experimental economics
KW - Framing effects
KW - Subsidy
KW - Tax incidence equivalence
UR - http://www.scopus.com/inward/record.url?scp=20944444689&partnerID=8YFLogxK
U2 - 10.1016/j.jpubeco.2004.04.009
DO - 10.1016/j.jpubeco.2004.04.009
M3 - Article
AN - SCOPUS:20944444689
SN - 0047-2727
VL - 89
SP - 1519
EP - 1542
JO - Journal of Public Economics
JF - Journal of Public Economics
IS - 8 SPEC. ISS.
ER -